Battle of the brands intensifies

4/1/2011

New insights on private-label marketing

In the aisles of grocery stores, battles are raging for shelf-space. Private labels, also known as store brands, are battling national brands to win the war of market share. Marketing professor Katrijn Gielens covers their battles like an imbedded journalist in a war zone, documenting the outcome of their strategic campaigns.

Over the years, Gielens has watched retailers become more powerful than manufacturers in consumer packaged goods. Regardless of how much manufacturers spend on efforts to increase their brand power, retailers stand between them and consumers since they control shelf space. Retailers want to increase their own category margins, which they can do by pushing private labels.

“The competition between private labels and national brands is heating up,” Gielens said. “Wherever you go in the world, private labels are commanding a greater market share. In the U.S., it’s about 20 percent, expected to increase to 30 percent. In the U.K., one of every two products purchased in a supermarket is a private label.” Private labels used to be positioned as economical, second-best alternatives. But as they step up efforts to compete with national brands, they’ve expanded into three tiers, offering a good-better-best quality line to increase their appeal to cost-conscious shoppers who are hesitant to give up the aspiration aspects intrinsic to national brands. Gielens and her colleagues at Tilburg University investigated how great a threat this expanded product line poses to national brands. Could retailers push private labels as far as they think they can?

They examined individual purchase data in the U.K. that used a very large household panel data set collected over a 13-year period that began in 1993. Through that data, which logs every grocery store item purchased by a household, they tracked the evolution of purchases in specific categories as economy and premium private-label lines were introduced sequentially. They used choice models to run the analysis of the econometric study to learn why the choice shares change. The researchers — Gielens, Inge Geyskens and Els Gijsbrechts published their findings in “Proliferating Private-Label Portfolios: How Introducing Economy and Premium Private Labels Influences Brand Choice” in the Journal of Marketing Research.

The results surprised the researchers. Competing with national brands was more complex than private-label manufacturers anticipated, Gielens said.

Generally, private labels damage national brands. But when private labels attempt to capture greater market share by introducing economy and premium lines, they can cannibalize the market share of their incumbent private-label lines. Customers loyal to the private label try the new products that come out at different tiers. Standard private-label sales suffer because the new product choices inevitably draw some standard and premium customers to the economy line, which cut into the label’s margin as well. Gielens calls this the divided loyalty effect.

Moreover, when private labels use umbrella branding—putting the same store brand name on all quality tiers—it stimulates the similarity effect, as Gielens calls it. “When you put your name on one of your economy lines, you risk diluting the quality perception of your standard line,” she said.

One way to combat the similarity effect is to create a different brand name for each line, separate from the store name. For instance, when retail giant Carrefour launched an economy line in its international markets, it called it “No 1.” Because the relationship between the new line and the regular Carrefour private label is not apparent, the separate brand name could form its own distinct cachet —and avoid the potentially negative spillover from the lower quality economy line.

Also, when introducing premium lines, some retailers deliberately choose to use a name that does not reference the store name, like Ahold did at its U.S. chain Stop & Shop when calling the premium line “Simply Enjoy.” As such, it does not risk tarnishing the price reputation of its existing lines and the store’s overall appeal. In contrast, the market share of the national brands can increase after the economy and premium lines are introduced. Specifically, premium quality national brands can enjoy a market share boost after premium private labels are introduced when it further increases consumers’ beliefs in the superiority of the national brand, which has invested substantially in innovation and advertising. This is called the attraction effect.

Still, the initial reaction of some national premium brands to the expanded product lines of private labels was to drop their prices in hopes of competing for the cost-conscious shopper’s business. Gielens counsels against this strategy for premium national brands.

“When you decrease your price, you make your brand more similar to private labels,” she said. “That’s not going to help you.”

By holding quality standards high, national brands set themselves apart. By maintaining that high quality, they reinforce consumers’ perception that they are better than private labels. And that strong branding appeal serves them well, even when private labels introduce a premium line.

Second-tier national brands also can win when economy private-label lines are introduced and needn’t fear direct competition with them. When economy private-label lines are introduced, these mainstream national brands can become the reasonable “compromise” option for more budget-oriented consumers. Consequently, second- tier national brands might sell well when closely positioned on the same shelf space as economy private labels. With that in mind, private labels could consider separate positioning, for instance, in a separate “featured bargain” section near the store’s entrance.

Continue to look for reports from Gielens on the ongoing battle between national brands and private labels for consumer allegiance. The econometric study of the effect of private label extension on market share has inspired her to launch a new study on the impact of new product introductions or product modifications that national brands might have on private labels.

Key take aways

National brands should avoid decreasing prices when competing with private labels.

Mainstream national brands can benefit from positioning their products closely on the same shelf as economy private labels because they become a reasonable compromise option.

Extending private-label tiers risks cannibalizing the entire line and decreases margin by drawing some premium customers to the economy tier.